Impact of New Rail Car Safety Regulations on Crude Markets in the U.S. and Canada

Impact of New Rail Car Safety Regulations on Crude Markets in the U.S. and Canada CERI 2015 Oil Conference Presented by: Harry Vidas Vice President, ICF International April 21, 2015 2015 ICF International. All rights reserved. 1

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Crude by Rail in Transition Today s Discussion: Rail movement growth where and why Incidents and Reactions Regulatory Changes and Possible Impacts 3

Bottom Line High growth rate in rail volumes has been driven by business need to accommodate crude production trends A number of very serious derailments have occurred which are triggering additional railcar safety regulations Conversion to safer cars may be impeded by limited capacity to retrofit existing fleet and build cars to new standards A short time frame for conversion could have a significant effect on crude production in Canada if export pipelines are not completed Regulations of rail car design do not guarantee derailments won t occur, and the consequences may drive much more severe limits on crude by rail 4

Crude by Rail Movement Trends Total U.S. crude by rail movements have increased to about 1 million b/d, with about 80% from the Bakken region CAPP projected Canadian rail movements to increase to just under 350,000 b/d in 4Q 2014 Barrels per Day 1,200,000 1,000,000 800,000 600,000 400,000 200,000 U.S. Originated Carloads of Crude Oil Western Canada Rail Movements Bakken Rail Export Mid Estimate 0 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 Source: Association of American Railroads 5

PADD 2 Rail Movements to U.S. and Canada Sustained growth in PADD 2 domestic Bakken movements Significant demand for Bakken in PADD 1 to displace more expensive foreign crudes; some Bakken feeds Eastern Canadian refineries Bakken demand growing into PADD 5 primarily Puget Sound Movements to PADD 3 reduced in 2014 as pipeline supply options increased from Cushing and the Permian into the Gulf Coast Thousand Barrels per Day 800 600 400 200 PADD 2 to Canada PADD 2 to PADD 5 PADD 2 to PADD 3 PADD 2 to PADD 2 PADD 2 to PADD 1 0 2010 2011 2012 2013 2014 Source: EIA Notes: 2010 does not include exports to Canada; Missing data is assumed to be average of reported data. 6

Rail Movement Trends, 2011-2014 2011 2012 2013 2014 Source: EIA 7

Canadian Rail Movements to U.S. Canadian rail exports to the U.S. have grown by 275% annually since 2011 currently about 2 unit trains per day A mix of heavy and light Canadian crude is railed to PADD 1; PADD 3 receives mostly heavy Canadian crude Thousand Barrels per Day 120 90 60 30 Canada to PADD 5 Canada to PADD 3 Canada to PADD 2 Canada to PADD 1 0 2011 2012 2013 2014 Source: EIA Notes: 2011 does not include exports to PADDs 1 and 2; Missing data is assumed to be average of reported data. 8

Current & Planned Rail Unloading Focus of rail unloading has been on the coasts; PADD 2 refineries are easily supplied by non-rail options Nearly 1 million b/d of rail unloading capacity has come online in the last year Impending DOT regulations, high-profile accidents, and low crude oil prices/altered rail economics may postpone or cancel planned projects Utilization of current terminals is low roughly 30% (1 million barrels/day moved in 2014 vs 3.4 million barrels/day capacity) Capacity, tb/d Current Planned Total PADD 1 940 105 1,045 PADD 2 50 155 205 PADD 3 1,880 920 2,799 PADD 5 523 1,050 1,572 Total 3,432 2,229 5,661 Source: Company websites, SEC filings, and investor materials * Sums may not equal totals due to independent rounding Thousand Barrels per Day 2,000 1,500 1,000 500 0 Capacity 2014 Receipts 48% Source: EIA * % indicate utilization 16% 33% PADD 1 PADD 3 PADD 5 9

East Coast Rail Offloading Infrastructure About 940,000 b/d rail receiving capacity on East Coast over 80% of coastal refinery capacity built by refiners and midstream players Value of investments related to value of Optionality to optimize imported versus domestic crude Company City State Capacity Started Notes Buckeye Albany NY 90,000* 2012 Global Albany NY 90,000* 2012 Sunoco Westville NJ 45,000 Q1 2012 PBF Delaware City DE 210,000 Feb-2013 Philadelphia Energy Solutions Philadelphia PA 210,000 Mid-2013 Plains All American Yorktown VA 140,000 Dec-2013 Enbridge Eddystone PA 80,000 May-2014 Rail to Albany; marine to EC and Canadian (Irving) refineries Rail to Albany; marine to EC refineries (Phillips 66) Expected to double; rail to Westville; marine to EC refineries Direct rail to Delaware City; barge to Paulsboro refinery; 130 light/80 heavy Direct rail to refinery; expanded to 210,000 b/d end 2014 Rail to Yorktown; marine to EC refineries Expandable to 160,000 b/d; supplies via barge along Delaware River Phillips 66 Linden NJ 75,000 Aug-2014 Direct rail to refinery Total 940,000 * NY State restricts total crude throughput by rail at Albany to 180,000 b/d 10

Optionality a Driver for Producers & Refiners Delivered Nigerian Price vs. Bakken Source: Bloomberg 11

U.S. Rail Accidents Total rail accidents and rail accidents involving the release of hazards materials have broadly declined in the United States since the 1970s and early 1980s Source: John Kemp (Reuters) 12

U.S. Crude by Rail Incidents However, rail incidents involving crude oil are up significantly since 2010 as crude movement by rail has grown in the United States U.S. Crude Oil Train Incidents 80 70 60 50 40 30 20 10 0 1980 1985 1990 1995 2000 2005 2010 120 100 80 60 40 20 2011-2014 Incidents by Major Carrier 0 Union Pacific BNSF CSX Corp. Kansas City Southern Source: PHMSA, Propublica Norfolk Southern 80 70 60 50 40 30 20 10 0 80 70 60 50 40 30 20 10 0 2011-2014 Incidents by Crude Origin State (Top 5) N.D. Tex. Okla. N.M. Minn. 2011-2014 Incidents by Incident Location (Top 5) Tex. La. Pa. Ark. Calif. 13

Fiery Derailments Driving Regulatory Policy Crude Oil Train Derailments Involving Fires Since 2013 Gainford, AB CN Railway 13 Cars Derailed Crude, LPG DOT-112J Oct. 19, 2013 Near Timmons, ON CN Railway 29 Cars Derailed Unknown Crude CPC 1232 Feb. 14, 2015 Near Gogama, ON CN Railway 38 Cars Derailed Unknown Crude CPC 1232 March 7, 2015 Plaster Rock, NB CN Railway 19 Cars Derailed LPG, Crude DOT-111 Jan. 7, 2014 Casselton, ND BNSF Railway 21 Cars Derailed Bakken Crude DOT-111 Dec. 30, 2013 Lac-Megantic, QC MM&A Railway 72 Cars Derailed Bakken Crude DOT-111 July 6, 2013 Galena, IL BNSF Railway 8 Cars Derailed Unknown Crude Unknown Car Type March 4, 2015 Source: PHMSA, Reuters New Augusta, MS CN Railway 21 Cars Derailed Alberta Crude Unknown Car Type Jan. 31, 2014 Pickens County, AL Genesee & Wyoming 25 Cars Derailed Bakken Crude DOT-111 Nov. 8, 2013 Lynchburg, VA CSX Corp. 15 Cars Derailed Bakken Crude Some DOT-111 April 30, 2014 Mount Carbon, WVA CSX Corp. 26 Cars Derailed Bakken Crude CPC 1232 Feb. 16, 2015 14

Derailments have Spurred Regulation Transport Canada: Regulation has been finalized; awaiting Governor-in-Council approval U.S. DOT/PHMSA: Regulation proposed in May 2014; Comments received in October 2014; Final regulation to be issued May 12, 2015 We anticipate U.S. and Canadian regulations will be aligned on the required railcar standards and the timing of implementation 15

As well as State/Federal Proposed Actions California S.B. 861 s crude-by-rail provisions require that oiltransporting railroads prepare the oil spill contingency plans previously required of other facilities Washington State proposing two bills one, H.B. 1449 is similar to Cal S.B.861, and adds the requirement to provide advance notice of rail transfers; another, S.B. 5057, would require facilities receiving shipments of crude oil by rail to provide the Department of Ecology with advanced notice of said shipments and mandate minimum crew sizes for trains carrying hazardous materials New York implemented limits on annual crude-by-rail volumes through Albany terminals Plus, Senator Cantwell of Washington State has proposed a bill before the U.S. Senate which would immediately ban the shipment of crude in DOT-111 railcars 16

TC 117 Tank Car Specifications 4 Head Shields: helps protect head of tank car from puncture. Requires full head shield that covers entire head of tank car. 1 Top-Fitting Protection: 2 Thermal Protection Including essentially covers the valves and a Jacket: an outer cover that is accessories on top of a tank car. It placed on the exterior of the shell, also protects the pressure release used mainly to provide thermal valve from damage. The top-fitting protection and keep insulation in requirement is similar to the place. Built to withstand a 100 TP14877/CPC1232 requirements. minute pool fire and a 30 minute jet fire without rupturing. 4 5 Source: Transport Canada Improved Bottom Outlet Valves: designed for valves to withstand derailments and helps to ensure they don t leak during a potential accident. 3 Thicker Normalized Steel: thicker shell and heads provide improved puncture resistance and structural strength. Using normalized steel improves the toughness and ductility of the material, providing increased fracture resistance of the tank car. The regulation prescribes a thickness of 9/16th of an inch. 17

Transport Canada vs. Proposed DOT - Cars Specifications Older Legacy DOT 111 tank cars DOT-111 (CPC 1232)/TP14877 built since 2011 New TC/DOT 117 Head Shields No Half Full Full PHMSA Option #1 Top Fitting Protection Optional Mandatory Mandatory Mandatory Thermal Protection (Jacket) Optional Optional Mandatory Mandatory Thickness of Steel 7/16 inch 1/2 inch for nonjacketed cars 7/16 inch for jacketed cars Performance Standard for Bottom Outlet Valves Performance Standard for Thermal Protection, Top Fitting Protection and Head and Shell Puncture Resistance Source: Transport Canada, PHMSA. 9/16 inch minimum No No Yes Yes No No Yes Yes 9/16 inch minimum Note: In addition to the above categories, TC and PHMSA proposed safety specifications requires jacketing and electronic controlled pneumatic (ECP) brakes. Both TC and PHMSA also require reclosing pressure relief valves. 18

Transport Canada vs. Proposed DOT - Timing Implementation Dates Flammable Liquid / Packing Group(s) Tank Car Type Removed from Service May 1, 2017 Crude Oil DOT-111 Non-jacketed May 1, 2020 Ethanol DOT-111 Non-jacketed December 1, 2020 Transport Canada All Crude (PG I, II, III) and Ethanol DOT-111 Jacketed July 1, 2023 Crude Oil and Ethanol Non-Jacketed CPC 1232 May 1, 2025 Crude Oil and Ethanol and all remaining Flammable Liquids (PG I, II, III) Jacketed CPC 1232 in Crude Oil Service and all remaining DOT 111 Jacketed and Non-Jacketed and CPC 1232 tank cars Source: Transport Canada Implementation Dates U.S. DOT Flammable Liquid / Packing Group(s) October 1, 2017 PG I DOT-111, CPC 1232 October 1, 2018 PG II DOT-111, CPC 1232 October 1, 2020 PG III DOT-111, CPC 1232 Tank Car Type Either Removed or Retrofitted Source: U.S. DOT PHMSA 2014 Proposed Regulation Note: PG I may include all U.S. shale crude. PG II may include Canadian dilbit, railbit, ethanol, and all other flammables. 19

Rail Reg. Issues Likely to Impact Midstream ICF studied the impact of the PHMSA proposed regulations for API in 2014 The proposed timetable coupled with increasing demand for railcar movements from the U.S. and Canada (and more if KXL is not built) would have been very challenging with limited industry new car build and retrofit shop capacity. Lower crude prices may impact the future drive to move crude by rail, but lack of pipeline options for East and West Coast refiners may still pull significant demand by rail. Canadian rail movements in heated railcars could increase substantially with no other nearterm pipeline export options. Final regulations will impact the rail movements, but the timetable will determine the magnitude. Lease costs, currently depressed, may increase significantly for cars compliant with the new regulation. Access to railcars may be a larger issue than cost if the timetable is similar DOT or TC timing Pre-Oil-Price-Drop Crude Oil by Rail Transportation Forecasts Source: ICF. PHMSA. Draft Regulatory Impact Analysis (RIA). Docket No. PHMSA-2012-0082, HM-251. DOT, July 2014. P. 36. 20

Impact on Industry: Key Factors Volume of Crude Economic to Move by Rail price drop may reduce expected growth, although Canadian will need to increase if export lines, including KXL, continue to lag Logistics must move by rail no pipelines Economics better netbacks by rail vs. pipeline New Build and Shop Retrofit Capacity retrofit capacity the major constraint Timing of Mandates for New or Retrofitted Cars likely to vary for different Packing Groups or commodities Quality Control Issues for Crude Oils Bakken RVP regulations in effect April 1, but regulations will require significantly more notification and transparency to states, counties and cities in the rail routes. Regulatory Consistency Transport Canada and U.S. DOT 21

Retrofit capacity vs PHMSA assumption PHMSA assumed a very high capability to retrofit cars, but in fact it is much lower as both the ATT and RSI estimates show. Retrofitting existing railcars could take 4 to 6 times as long as PHMSA estimated. Source: ICF International. The Economic Impacts of Changes to the Specifications for the North American Rail Tank Car Fleet. 22

Impact on Canadian Industry Export pipeline delays could limit oil sands production growth (except for several existing line capacity expansions) High dependency on rail to support future production growth until crude export pipelines become operational Higher rail costs to deliver may reduce netbacks May make it more difficult for WCS to compete in USGC Likely need for thermally protected (heated) cars as well as loading facilities Dilbit vs. Railbit vs. Bitumen loading options for rail What results in best economics for producers and refiners? Dilbit blends require more railcars to deliver a fixed bitumen supply than raw bitumen or railbit, but also require more diluent 23

Perspectives Regulations will likely be harmonized between Canada and the U.S. due to the degree of current and future rail movements across the border It is critical to railcar availability that adequate time is provided to allow railcars to be built or retrofitted to new standards While lower oil prices may stabilize U.S. railcar loadings for a time, Canadian railcar requirements are expected to increase possibly substantially dependent on export pipeline status Despite new regulations on rail car designs, the potential for more derailments is possible due to track problems and human error. The magnitude and consequences of those derailments may trigger immediate response from governments to curtail crude movements by rail. This may have severe impacts on the industry in both the U.S. and Canada. 24

Harry Vidas Harry.Vidas@icfi.com ICF International 9300 Lee Highway Fairfax Virginia 22031 703-218-2745 James D. Brown James.Brown@icfi.com ICF Consulting Canada Suite 605, 734 7 th Avenue SW Calgary Alberta Canada, T2P 3P8 587-390-8305 25